JOHNSTON (10/17/04): Teresa Heinz Kerry reported income of just over $5 million last year, slightly more than half of it from investments in tax-exempt municipal and state bonds, her 2003 income tax return shows, confirming her status as the wealthiest spouse of any major party nominee in United States history...

The two-page document...showed total income of $5,073,554 last year. Her primary source of income was the tax-exempt bonds, investments that generally produce a lower interest rate, but those in the highest tax brackets can often pocket more cash if they choose municipals.

Ms. Heinz Kerry paid a federal tax of $628,401, which is 12.3 percent of her total income and 27.4 percent of her adjusted gross income.

As regular readers will know, I'm a big fan of a progressive tax system, but let's get crazy about municipal, or tax free bonds.

First, tax-free bonds are good things. They finance essential public infrastructure (hospitals, roads, libraries) and allow these institutions access to lower rates of debt.

Second, tax-free bonds are not tax-free. Rather, the investor in tax-free bonds accepts a lower rate of interest in lieu of paying taxes.

Let's take Ms. Heinz Kerry's example.

She earned $2.5 million in interest on an estimated $50 million investment in tax-free bonds. (I'm guessing she's getting 5% tax free on her money.)

If she would have invested that money in taxable corporate bonds, she would have earned $500,000 to $1 million dollars more on her money. (I'm guessing Teresa Heinz Kerry could have gotten 6% to 7% on her money at similar rated corporate bonds.)

That extra $500,000 or $1 million is the 'tax' she paid on that income. If you included that money into her ~$600,000 she paid in taxes, Teresa Heinz Kerry would have an effective federal tax rate of somewhere between 20% and 27%.

More importantly, that forfieted income is, for all intent purposes, the very same thing as a tax. It goes to fund public infrastructure. It's money that would have gone to the investor otherwise. Basically, it's a pretty good thing.

Now, this is a way for Teresa Kerry Heinz to avoid paying the top (38%) tax rate. She pays somewhere in the range of 20-35%, depending on the comparable taxable investments. But that's what the market bears.

That 15% dividend tax rate though. That's just evil! More on that later.